More than stability, Leviathan needs customers

Hedy Cohen

Without customers, the huge investments required to develop the reservoirs cannot be justified.

"I very much hope that development of the Leviathan reservoir, which began last January, will now continue on the original timetable established in the natural gas plan," Minister of National Infrastructures, Energy and Water Resources Yuval Steinitz said yesterday, after the government negotiating team reached a compromise on the stability clause in the agreement with the gas companies, promising no major regulatory changes for ten years, only two months after the High Court of Justice struck down that clause.

The gas companies' stock market prices rose sharply today, following the agreement, headed by Ratio Oil Exploration (1992) LP (TASE:RATI.L) with an 8% jump, Delek Drilling Limited Partnership (TASE: DEDR.L) (5%), and Avner Oil and Gas LP (TASE: AVNR.L) (6%). The stability clause has been softened and moderated; it now does not tie the hands of future governments or prevent private member bills aimed at changes in the gas industry, but it is by no means certain that this is the problem.

In order for Leviathan to meet the late 2019 timetable set for it, make possible the development of the Karish and Tanin reservoirs, expand the Tamar reservoir, and attract other international energy companies to do business in Israel, customers must first be found to whom the gas can be sold. Without customers, the huge investments required to develop the reservoirs cannot be justified. The problem is that as of now, there are no such customers.

Demand in the domestic Israeli economy does not justify the development of Leviathan. The Palestinian Authority has canceled the only gas agreement signed by the partners. The Jordanian economy consumes very small quantities of gas (which it is now buying from Royal Dutch Shell), and since Royal Dutch Shell acquired British Gas, selling gas to the liquefaction facility in Egypt has become much less likely.

Royal Dutch Shell operates in Arab countries, and it is hard to believe that it will agree to financing the $2 billion cost of a pipeline from Israel to the facility. Turkey is an option, but still a remote one, and Europe will be willing to buy the gas only at a price at which the partners will not agree to sell.

An international gas expert who took part in the Flame Natural Gas Conference in Amsterdam this month told "Globes" today that Europe was looking for alternatives to Russian gas and wanted to diversify its sources of supply, but was unwilling to pay more than $3.50 for Israeli gas. According to his calculations, delivering gas to Europe for $3.50 would require the Leviathan partners to sell it at the well for free.

There is also Tamar - according to the gas plan, the government will allow exports from it even before Leviathan is developed. The government hoped that these early exports would enable the partners to expand Tamar, thereby increasing Israel's gas supply capacity. As of now, however, it appears that the Spanish company Union Fenosa, which owns a liquefaction facility in Egypt, and has already signed a letter of intent to export gas from Tamar, has lost its enthusiasm for the idea. Italian company ENI, Union Fenosa's partner in the facility, has meanwhile discovered the huge Zohr gas reservoir, and hopes to begin producing gas from it starting at the end of next year. Some of this gas could reach its liquefaction facility.

As far as attracting new international gas companies is concerned, Steinitz's globe hopping aimed at convincing them to come to Israel will be of no avail if Israel does not open its waters to oil and gas exploration. Four years have passed since Israel closed its economic waters to exploration, so that even if a company very much wanted to explore here, it would have been unable to do so. In other words, the stability clause - delicate, partial, and moderate as it may be - will not succeed in finding customers or attracting companies.

In fact, it will do the opposite. The original stability clause included a government commitment to refrain from material changes in the gas sector in all matters pertaining to taxation, ownership of the reservoirs, and exports. The softened clause contains no such commitment; instead, there is a promise "to positively consider" granting compensation in some way to the gas companies if profits are lost. This compensation, however, cannot ensure customers in the neighboring countries that the rules of the game will not be changed in the future. Customers in the export market want a commitment to buy gas for at least 15 years; otherwise, they will turn to Qatar, Australia, the US, or East Africa, where gas reservoirs have been discovered and are begging for customers. The job of the government, now that it has "defended" the public by changing the stability clause, is to make sure that the public benefits from the gas, whether through increasing subsidies to enterprises for being hooked up to the gas; guaranteeing electricity rate coverage for Israel Electric Corporation (IEC) (TASE: ELEC.B22), so that it will use more gas and less cheap coal; introducing the use of natural gas for transportation; or by encouraging private developers to build gas-driven power stations. The government's achievements will be measured by these criteria.

Published by Globes [online], Israel business news - - on May 19, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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